National Supervision Policy Manual - ncua.gov · National Supervision Policy Manual Version 8.0...

National Supervision Policy Manual Version 9.0

Introduction The National Supervision Policy Manual (NSPM) establishes national policies, procedures, and guidelines for effective district management, supervision of credit unions, and quality assurance. Promoting the consistent application of the examination procedures outlined in the NSPM, and vetting and coordin-ating across the agency the need for any additional examination policies and procedures furthers its purpose.

While supervisors have the right and responsibility to assign work and manage staff, they should not institute new or additional standard operating pro-cedures, a practice often referred to as "layering." Implementing additional procedures that apply to all examiners in an SE group or field office, or estab-lishing general policy that is narrower than national guidance, is not appro-priate. On a case-by-case basis, supervisors can and should implement procedures to manage risk in specific credit unions and/or address the devel-opment needs of individual employees.

Adoption by field offices or supervisors of any alternative or additional exam-ination policies, procedures, or directives beyond what is addressed in the NSPM and other national guidance must be cleared through the Exam Steering Group and the Office of Examination and Insurance (E&I). The Exam Steering Group will review and evaluate field office and/or SE level specific practices to determine if they require E&I approval.

Introduction i


Table of Contents

Introduction i

Feedback? i

Table of Contents i

Chapter 1. Administrative Remedies 1

1. General Responsibilities 1

2. Types of Administrative Remedies 3

3. Document of Resolution 5

4. Regional Director Letter 17

5. Letter of Understanding and Agreement 18

6. Preliminary Warning Letter 27

7. Civil Money Penalty 31

8. Status Update 33

9. Special Assistance Cases 34

10. Control Reports 34

11. Templates 35

RDL Sample 36

Notify FISCU of Troubled Condition 38

Upgrade FISCU from Troubled Condition Status 40

Acknowledge LUA and CAMEL Downgrade 41

LUA Addendum 43

LUA Cover Letter 44

Non-published LUA 45

Remove LUA 50

PWL Sample 51

Table of Contents i


BSA-Specific PWL 53

PWL Removal Samples 55

Chapter 2. Audits and Recordkeeping 57

1. Field Staff Responsibilities 57

2. Audit Firms Located Outside the Geographic Area 57

3. Audit Report Review 58

4. Unacceptable Audits and Member Account Verifications 60

5. Audits by Licensed Independent Accountants 61

6. Significant Recordkeeping Concerns 62

7. Addressing Bond Claims 65

8. Determine Bondability Status 65

Chapter 3. BSA Enforcement 67

1. References 67

2. Suspicious Activity Report (SARs) 67

3. Requesting a Currency Transaction Report, Suspicious Activity Report, or Designation of Exempt Persons History 69

4. BSA Enforcement 69

5. BSA Violations

6. AIRES FinCEN.doc

7. Resolution of Significant BSA Violations 82

8. Reporting the Resolution of a BSA Violation 84

9. BSA Control Reports 85

Chapter 4. Change of Officials for Troubled and Newly Chartered Credit Unions 87

1. DOS Responsibilities 87

2. Field Staff Responsibilities 89

Table of Contents

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81

ii

89


3. Affected Credit Unions

4. Required Information 89

5. Approval Process 89

6. Waiver of 30 Day Notification Requirement 90

7. Grounds for Denial 91

8. Request for Reconsideration and/or Appeal 92

9. Application Withdrawal 93

10. Templates 93

Respond to Incomplete Application 94

Acknowledge Complete Application 95

Waive 30-Day Notification Requirement 96

Approve Change of Officials 97

Deny Change of Officials Due In Part to Adverse Credit 98

Deny Change of Officials Due In Part to Adverse Credit - Applicant Let-ter 100

Deny Change of Officials Not Due to Adverse Credit 102

Deny Change of Officials Not Due to Adverse Credit - Applicant Letter 104

Pre-Adverse Action Disclosure Letter 106

Acknowledge Request to Withdraw Application 107

Chapter 5. Corporate Credit Union Program and Procedures 108

1. ONES Mission 108

2. ONES Policies and Procedures

3. Corporate Regulatory Waivers 109

4. Processing Corporate Requests for Expanded Authority 111

5. Investment Action Plans 114

6. Capital Restoration Plans

Table of Contents

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116

iii


7. Corporate Credit Union Service Organizations 121

8. Prompt Corrective Action 124

Chapter 6. CUSO Registry 128

1. Field Staff and Regional Office Responsibilities 129

2. Additional Regional Office Responsibilities 130

3. Templates 130

CUSO Registry Reporting Concern 131

CUSO Registry Examination Follow-Up 132

CUSO Registry RDL to CU Owners or Lenders 134

Chapter 7. CUSO Reviews 136

1. General Responsibilities Regarding CUSOs 137

2. Selecting, Scheduling, and Resourcing CUSO Reviews 138

3. Scope of Review 139

4. CUSO Review Report and Workpapers 140

5. Distributing a Draft Review Report 141

6. Distributing a Final Review Report 143

7. Management Conference 144

8. CUSO Follow-Up Reviews 145

9. CUSO Review Report Maintenance 145

10. State Supervisory Authorities & CUSO Reviews 146

11. Templates 147

CUSO Pre-Review Letter_Redacted 148

CUSO_Review_Scope_Workbook_Redacted 152

CUSO Financial Template 204

CUSO Review Report Template 207

Table of Contents iv


Draft Report Cover Letter to CUSO 217

Draft Report Cover Letter to SSA 219

Final Report Cover Letter to CUSO 220

Final Report Cover Letter to Investors and Lenders 222

Final Report Cover Letter to SSA 223

Chapter 8. Derivatives Authority 224

1. Roles and Responsibilities 224

2. Derivative Application Review Procedures (federal credit unions only) 227

3. Derivatives Application Appeal Process 233

4. Derivative Notification Procedures (FISCUs only) 234

5. Derivatives Monitoring and Controls 235

6. Templates 235

Derivatives Information Administration Log (DIAL) 237

Derivatives Authority Qualitative Review Checklist 240

Respond to Incomplete Application for Derivatives Authority 253

Acknowledge Interim Application for Derivatives Authority 254

Approve Derivatives Authority (Interim) 255

Acknowledge Notification of Readiness (Final Application for Deriv-atives Authority) 256

Approve Derivatives Authority (Final) 257

Deny Application for Derivatives Authority 258

NCUA Notification of FISCU Derivatives Activity (FISCUs only) 260

Acknowledge Appeal 261

Deny Appeal 262

Chapter 9. Dishonesty, Fraud, and Insider Dealings 263

Table of Contents v


1. When Fraud is Confirmed or Suspected 263

2. Fraud Indicator Report 271

3. Fraud Hotline Investigations 273

4. Templates 274

CU-BOD-FraudDiscoveryChecklist 275

ExaminerFraudDiscoveryChecklist_Redacted 280

DatabaseSearchRequestForm_Redacted 284

FraudChronology_Redacted 285

FraudReport_Redacted 286

Chapter 10. District Management 291

1. General Supervision Responsibilities 291

2. Examination and Supervision Budgeting 296

3. Administrative Record 302

4. Document of Resolution

5. Supervision Chronology Report 314

6. Administrative Actions for Troubled Credit Unions 315

7. Notice of Troubled Condition 315

8. FISCU in Troubled Condition

9. Call Report, Trending Analysis, and RATE 318

10. Administrative Items 321

11. Confidential Section

12. Joint Conferences and Exit Meetings 331

13. Communicating Directly with a Credit Union 332

14. Communicating with Law Enforcement, Outside Audit Firms, or Other Federal Agencies 334

15. Supervising a New Credit Union 334

Table of Contents

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316

329

vi

335


16. Critical Case Credit Unions

17. Control Reports 337

18. Develop and Issue Guidance 338

19. Templates 340

Supervision Chronology Report 341

Team Memo 343

Chapter 11. Examination Complaints 346

1. Material Supervisory Determination Exclusions 347

2. Examination Complaint Investigation Goals 347


4. Templates 350

Acknowledge Examination Complaint 351

Regional Summary – Exam Appeals and Complaints 352

Respond to Examination Complaint (sample) 354

Chapter 12. Examination Reports 355

Chapter 13. Fair Lending Examination Program and Procedures 357


2. Federal Credit Union Selection for Review 360

3. Requested Participation for SCU Selected for Review by SSA 361

4. On-Site Fair Lending Exams (WCC 03) 361

5. Off-Site Fair Lending Exams (WCC 33) 362

6. Contact Documentation 363

7. Contact Follow-Up 364

8. Administrative Remedies 364

9. Administrative Items

Table of Contents

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10. Quality Assurance 368

Chapter 14. Federal Credit Union Program and Procedures 370

1. Examination Planning 370

2. Membership Data Information 376

3. Federal Credit Union Examinations (WCC 10) 376

4. Federal Credit Union Supervision Contacts 377

5. OCFP/Regional Office Fair Lending Examinations and Supervision Contact Coordination 385

Chapter 15. FISCU Program and Procedures 388

1. Exam Types 389

2. Examination Planning 393

3. Communication with an SSA 397

4. Supervision Contacts 398

5. Review a State Examination (WCC 26) 408

6. Request Additional Information from an SSA 412

7. Disclose NCUA CAMEL and Risk Ratings 412

8. Joint Conferences 416

9. Issue a Report to a FISCU 417

10. AIRES Uploads 418

11. Credit Union Enforcement Action 418

12. Consumer Compliance Program 419

13. NCUA Responsibilities Regarding Compliance Regulations 420

Chapter 16. Prompt Corrective Action 421

1. Prompt Corrective Action Classification 421

2. Earnings and Reserve Transfer Requirements for “Adequately Cap-italized” or Lower Federally Insured Credit Unions 424

Table of Contents viii


3. Net Worth Restoration Plans and Revised Business Plans 426

4. Invoking Discretionary Supervisory Actions and Other Corrective Actions for a Critically Undercapitalized Credit Union 430

5. Applications for PCA Risk Mitigation Credit 431

6. Monitoring and Controls 432

7. Templates 433

Quarterly PCA Tracking Report 434

Regional Summary of DSA Board Approval (EI format) 436

Regional Summary of DSA RD Approval 437

Regional Summary of OCA RD Approval 439

Net Worth Category Reclassification Samples 441

Sample pro forma financials and ratios 444

NWRP RBP and Assumptions Workbook Sample 445

Regional Summary of NWRP RBP Review 448

NWRP RBP Review Checklist 450

Approve NWRP RBP 451

Deny NWRP RBP 452

Notify CU of Need to Revise or Replace NWRP 454

Notify CU of Need to Submit NWRP RBP 456

Notify CU that NWRP RBP Is No Longer Required 458

Chapter 17. Quality Assurance Program 461

1. Quality Assurance Goals 461

2. Quality Assurance Roles and Responsibilities 462

3. Supervisor Reviews 463

4. Quality Control Reviews 468

5. Templates 472

Table of Contents ix


Chapter 18. Regulatory Waivers and other Regulatory Actions 473


2. Occupancy Waiver 483

Respond to Incomplete Request for Occupancy Waiver 486

Acknowledge Request for Occupancy Waiver 487

Regional Summary of Occupancy Waiver Request 488

Approve Request for Occupancy Waiver 490

Deny Request for Occupancy Waiver 491

3. Non-Member Deposits Limitation Waiver 492

Respond to Incomplete Request for Non-Member Deposit Exemp-tion 494

Acknowledge Request for Non-Member Deposit Exemption 496

Regional Summary of Non-Member Deposit Exemption 497

Approve Request for Non-Member Deposit Exemption 500

Deny Request for Non-Member Deposit Exemption 501

Respond to Violation of Non-Member Deposit Exemption 502

4. Earnings Transfer Waiver 504

Respond to Incomplete Request to Decrease Earnings Transfer Requirements 507

Regional Summary of Decrease in Earnings Transfer Requirement 508

Approve Request to Reduce Earnings Transfer Requirement 509

Deny Request to Reduce Earnings Transfer Requirement 511

5. Loan Participation Waiver 512

Respond to Incomplete Request for Loan Participation Limit Waiver 514

Acknowledge Request for Loan Participation Limit Waiver 515

Regional Summary of Loan Participation Limit Waiver 516

Table of Contents x


Approve Request for Loan Participation Limit Waiver 519

Deny Request for Loan Participation Limit Waiver 520

6. Secondary Capital 521

Respond to Incomplete Proposed Secondary Capital Plan 530

Acknowledge Submission of Secondary Capital Plan 531

Regional Summary of Secondary Capital Plan Application 532

Approve Secondary Capital Plan with Contingency 534

Approve Secondary Capital Plan 535

Deny Secondary Capital Plan 536

Acknowledge Request to Redeem Secondary Capital 537

Regional Summary of Request to Redeem Secondary Capital 538

Approve Request to Redeem Secondary Capital 540

7. Templates 541

Chapter 19. Unauthorized Access to Member Information 542


2. Process Notifications 545

3. Assess Response Plan Effectiveness 545

4. Ensure Supervision Plans are Commensurate with Risk 546

5. Templates 548

Acknowledge Notification of Unauthorized Access 550

Regional Summary – Unauthorized Access 551

Respond to Unauthorized Access Notification (sample) 553

IT Incident Checklist 554

Acknowlege Deferred Follow-up 556

Acknowlege 60 day Follow-up 557

Table of Contents xi


Work Assignment Memo 558

Closing Letter 560

Chapter 20. Work Classification Codes 562

1. Reporting SME Time 562

2. Reporting Specialist Time 562

3. General Work Classification Codes 562

4. Administrative Work Classification Codes 574

5. Subject Matter Examiner Time Codes 578

6. Office of Consumer Financial Protection Work Classification Codes 579

Enforcement Authorities for Credit Unions 581

Regional Office Map 584

Glossary i

Index xv

Table of Contents xii


Chapter 1. Administrative Remedies Administrative remedies are a broad range of actions that, while including formal actions such as published LUAs and cease and desist orders, also includes informal actions such as DORs, RDLs, unpublished LUAs, and PWLs. These actions are available to prevent or eliminate serious operational and fin-ancial problems in credit unions. Administrative remedies provide protection to credit unions, credit union members, creditors, the share insurance fund, and the credit union industry. Administrative remedies are tools available to the NCUA to affect problem resolution.

The NSPM provides an overview of administrative actions and establishes expectations, procedures, and controls for developing and processing specific informal and formal actions. This guidance, and the provided correspondence templates, are intended to improve efficiency and consistency in preparing administrative actions. The templates must be modified to make them suitable for the particular facts and circumstances of a given case. The details of the par-ticular problems, as well as the expected timeframes and specific corrective action, should be clearly spelled out in the body of the agreement. The Office of General Counsel is available to assist in preparing, reviewing, and nego-tiating any formal administrative action should such assistance be desired and requested by the regional office.

Formal administrative action processes and guidance are referenced in NCUA Instruction 4820, Enforcement Manual, and chapters 29 and 30 of the Exam-iner's Guide.

For more information about administrative remedies, see Supervisory Let-ter 10-04, Administrative Remedies, NCUA Instruction 4820, Enforcement Manual; NCUA Instruction 4810, Special Assistance Manual; and Chapters 29 and 30 of the Examiner's Guide.

Last updated July 29, 2015

1. General Responsibilities

A. E&I and OGC

l Review administrative actions for concurrence when required under del-egated authority

Chapter 1. Administrative Remedies Page 1 of 584

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l Routinely request reports from the regions and may periodically request a sampling of issued administrative actions for quality control purposes as part of an ongoing quality assurance process

l Review regional activity as a means of tracking regional and national trends for resource, consistency, and policy formation purposes and will issue a semi-annual national summary of administrative actions

l Provide advice and guidance on the use and issuance of administrative actions

B. Regional Directors

l Ensure any recommended administrative action is warranted and sup-ported

l Confirm proper monitoring of administrative actions and sufficient pro-gress of problem resolution

l Provide a process to track administrative actions and provide Control Reports as discussed in BSA Control Reports

C. Supervisors

l Confirm examiners adequately recognize and address risk(s) and use the appropriate level of administrative action

l Follow the administrative action processes in this section of the NSPM, while ensuring proper analysis and documentation supports all admin-istrative actions

l Monitor examiners’ supervision plans and activities for compliance with appropriate resolution and national requirements

l Confirm compliance with agreed-upon corrective action and timeframes and review examiners’ recommended alternative actions based upon the level of resolution

l Ensure documents drafted by examiners are professional and results-ori-ented

D. Field Staff

l Detect and formulate action plans to resolve credit union problems before they become insurmountable



l Address issues during examinations and supervision contacts and recom-mend elevated actions when appropriate

l Certain administrative actions are expected on all CAMEL 4 and 5 credit unions. See Supervisory Letter 10-04, Administrative Rem-edies, and the Administrative Actions for Troubled Credit Unions sec-tion of the NSPM for more information.

l Adhere to administrative action processes in this section and draft neces-sary documents

l Work with their supervisor to provide analysis and documentation that sup-ports any recommended action

l Provide correspondence to credit unions that is accurate, easily under-stood, and results-oriented with clearly established expectations and goals

l Monitor credit union compliance with agreed-upon corrective action and timeframes and recommend necessary alternative actions based upon the level of resolution


2. Types of Administrative Remedies Administrative remedies fall into two different categories: informal actions and formal actions.

Informal Actions Formal Actions

l Published letter of under-standing and agreement

l Document of resolution l Immediate

l Regional director letter and/or per-l Non-published letter of understanding and agree- manent cease ment and desist order

l Civil money pen-alty

l Preliminary warning letter

l Involuntary liquidation


http://ncuacentral/EANDI/Shared Documents/EI Letters to CU's, Supervisory Letters, and Risk Alerts/Supervisory Letter 10-04 - Administrative Remedies.pdfhttp://ncuacentral/EANDI/Shared Documents/EI Letters to CU's, Supervisory Letters, and Risk Alerts/Supervisory Letter 10-04 - Administrative Remedies.pdf


l Conservatorship

l Removal and/or prohibition

l Termination of insurance and/or revoc-ation of charter

l Some PCA-related actions, such as ordering a new election or dismissing a director or senior officer

A. Informal Actions

With the exception of a DOR, the Regional Director must approve all informal actions.

B. Formal Actions

Formal actions, also known as enforcement actions, are taken when an event triggers a level of concern requiring immediate attention and/or informal actions have not resolved the core concerns to the NCUA’s satisfaction. Unlike most informal actions, formal actions are authorized by statute (and, in some cases, mandated), are generally more severe, and may be disclosed to the public. The Office of General Counsel must be consulted on all formal actions and they must be approved as outlined in the Delegations of Authority. When considering a formal action, consult OGC as early in the process as possible.

Before deciding to take formal administrative action, an examiner and their supervisor must clearly understand the nature of a credit union's problems and why any previous attempts to resolve the problems failed. Examiners are responsible for ensuring an administrative record presents a complete, factual, and fully documented history of the credit union's problems and the examiner’s concerns about the credit union. Examiners will recommend formal admin-istrative action after consulting with their supervisor. Prior to proceeding, the supervisor will discuss the action with the associate regional director, who will receive concurrence from the Regional Director. It is critical that the field and



region initiate communication early when formal administrative action is recom-mended.

See NCUA Instruction 4820, Enforcement Manual, for more information about processing formal administrative actions.

Last updated March 24, 2017

3. Document of Resolution The AIRES DOR module enhances the administrative record as it improves the tracking and reporting of unresolved DOR items. Reports generated from this data summarize and track problem areas to highlight the resolution of out-standing problems. The AIRES 2005 User's Manual addresses the proper use of the DOR module. Examiners will make full use of the DOR module.

Through its lease agreements, the NCUA requires SSAs that use NCUA-issued laptops to use AIRES and, specifically, the DOR module. During the course of WCC 26 reviews, NCUA examiners will add any problem codes (and associated corrective action) needed beyond those entered by the SSA as required in the NSPM to complete a review of a state examination.

A. Field Staff Responsibilities

To ensure a full administrative record of problem areas, examiners will:

l Create DOR items and assign problem codes using the DOR module in AIRES

l Ensure DOR items are consistent between the DOR module and the DOR

l Require credit union management to submit a written action plan, within 30 days of receipt of the official examination report, if they do not agree to the DOR or adopt the DOR at the joint conference

l If communication and negotiation efforts are unsuccessful and the DOR is not adopted, examiners will require management to provide an alternative resolution plan and note management’s failure to adopt the DOR in the Confidential Section. Elevated administrative action will be used if management’s action plan is insufficient to address the problem(s) and the problem(s) remain unresolved.


http://portal.ncua.lan/sites/elibrary/Documents/Directives/Instructions and Bulletins/4820.pdfhttp://portal.ncua.lan/sites/elibrary/Documents/IT Info/AIRES Manual.pdf


If the SSA did not enter problem codes in the DOR module but provided a DOR to the credit union, NCUA examiners are required to do so for items that meet the NCUA’s definition of a DOR.

B. Quality Control

E&I periodically reviews reports and samples examinations to ensure com-pliance. E&I will notify the regions of any long-standing problems and DOR items. Regions are responsible for following up with field staff.


C. Extreme NEV Supervisory Test Results

The appropriate corrective action for extreme NEV Supervisory Test results depends on the source of the IRR exposure. (See NCUA Letter to Credit Unions 16-CU-08, Revised Interest Rate Risk Supervision.) Elevated levels of IRR raise the degree of potential urgency that a credit union may need to act. Con-sequently, examiners should request, through their field supervisor, assistance from specialized resources such as the Regional Capital Market Specialists for credit unions with extreme NEV Supervisory Test results.

When using credit union-generated NEV information (verified by the examiner) for FCUs greater than $100 million in assets1 and the NEV Supervisory Test res-ults are extreme, examiners must issue a DOR or other supervisory action to reduce the IRR exposure unless extenuating circumstances exist. The DOR will require credit union management to develop a plan to reduce the credit union’s IRR exposure to a less than an extreme risk level as measured by the NEV Supervisory Test and submit the plan to the Regional Director within 45 days of the DOR issuance, as seen below.

l Exam process (60 days) l When NEV supervisory results are extreme, issue DOR for man-agement to develop a plan to de-risk within 45 days

l Credit union develops de-risk plan (within 45 days) l Credit union management submits plan to de-risk within 45 days of DOR delivery.


https://www.ncua.gov/regulation-supervision/Pages/policy-compliance/communications/letters-to-credit-unions/2016/08.aspxhttp://publishedguides.ncua.lan/examiner/Pages/Default.htm


l NCUA reviews de-risk plan (within 30 days of receipt) l If revisions are necessary, credit union resubmits updated plan within 30 days and NCUA responds to revisions within 30 days.

l Credit union de-risks in accordance with de-risk plan l On- or off-site supervision to evaluate DOR progress until man-agement fully achieves DOR and reduces IRR exposure to plan levels.

Examiners will inform management during the DOR development process that an extreme IRR level represents undue risk (§741.3(d)). The NCUA will provide credit unions the opportunity to reduce the IRR level. However, in the rare cir-cumstances a credit union is unable or unwilling to de-risk, regions must follow a process that involves providing a recommendation to the NCUA Board to reclassify the credit union's net worth classification down a category based upon safety and soundness (§702.102(b)). In this rare situation, examiners will follow the process for unresolved extreme IRR.

1. Extenuating Circumstances

Extenuating circumstances may exist that suggest a DOR may not be neces-sary when the IRR level is extreme. Typically, a low book equity position or material positions in long duration asset portfolios that have significant price sensitivity cause extreme NEV Supervisory Test results. In a situation that involves a credit union building its low net worth through an existing NWRP and not holding long duration assets, the post shock NEV ratio would likely be extreme and the post shock NEV sensitivity likely low or moderate. A DOR would not be effective in this situation because the credit union is addressing its low net worth issue through the NWRP and the balance sheet’s IRR exposure is limited at low or moderate sensitivity. For further information on IRR related DORs, see Tab F – Overall IRR Rating – Section III: Supervisory Actions in the Guidance to IRR Workbook.

The timeframe to reduce IRR exposure depends upon the facts and cir-cumstances of the credit union and the de-risking strategy, typically either act-ive or passive strategies. (For more information, see Mitigation Strategies in the Examiner's Guide.)

D. Unresolved Extreme IRR

Extreme IRR is classified as unresolved if 45 days have elapsed since the DOR was issued and the credit union has not provided a plan to reduce the extreme


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IRR, or if credit union management refuses to accept the de-risking DOR (and a final report has been issued documenting the refusal).

NCUA regions are required to respond to a credit union’s unwillingness or inab-ility to de-risk. First, the NCUA region will inform the credit union of either:

l Inadequate progress towards developing a de-risking plan, or

l Inability or unwillingness to de-risk

The region will also recommend to the NCUA Board, through E&I, the reclas-sification of the credit union’s net worth classification, based on safety and soundness concerns associated with the extreme IRR level (§702.102).

Next, there is a timing-based open notice and opportunity for hearing, as described in §747.2003 of NCUA rules and regulations. If the NCUA Board determines, after the notice and opportunity for hearing, that the credit union is an unsafe or unsound condition or has not corrected a materially unsafe or unsound practice, it may reclassify the net worth classification of a "well capitalized" credit union down to "adequately capitalized," and require an "adequately capitalized" or "undercapitalized" credit union to comply with cer-tain mandatory or discretionary supervisory actions as if it were in the next lower net worth category, based upon safety and soundness (§702.102(b)).

A credit union may request the NCUA Board rescind a reclassification. This is likely to occur when the credit union is no longer in an unsafe or unsound con-dition, or has corrected a materially unsafe or unsound practice.

For more information about interest rate risk, see the NCUAExaminer's Guide.


1The IRR examination scope prescribes the number of exam steps using total assets. Credit unions with total assets of $100 million or less do not require the IRR Workbook, including the NEV Supervisory Test.

E. Outstanding DOR Items

Recurring or unresolved problems are continually identified as leading to credit union failures and losses to the share insurance fund. Examiners must ensure that items significant enough to be included in a DOR are resolved in a timely manner. For any credit union with a recurring or unresolved DOR item, regard-less of its CAMEL rating, field staff will:


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l Ensure all prior examination DOR items are properly noted as resolved, unresolved, or no longer applicable, and appropriately documented within the DOR module

l Ensure repeat problem areas are properly noted, with accurate com-ments and accurate dates of identification

l When the original identification date is used for a repeat DOR item, examiners will ensure the corrective action is the same as the pre-vious DOR (not necessarily the wording – but the type of corrective action).

l Document credit union officials’ failure to adequately resolve problems by placing an asterisk beside the repeat DOR item and include a footnote, "This is either a repeat or carry-over DOR. Please see the DOR Status Update document for specific information on individual DOR items."

l Consider the quality of management, and weigh management’s failure to resolve problems in the management CAMEL component and overall com-posite rating

If a credit union fails to take corrective action within the timeframe stated in the DOR, it must submit a written response to the examiner. This applies to all credit unions, regardless of CAMEL rating. If a credit union fails to take the cor-rective action agreed to at the last examination/supervision contact, exam-iners will document why management failed to take corrective action in the DOR module of AIRES (in the DOR Status and Comment section). If additional documentation is necessary beyond what is provided to the credit union in the DOR Status Report or other open sections of the report, examiners may use the Confidential Section.

If a credit union fails to address outstanding DOR items, the examiner will recommend additional enforcement action, such as a Regional Director letter, Letter of Understanding and Agreement, or Preliminary Warning Letter. If the supervisor does not concur with additional enforcement action, examiners will document the rationale in the Confidential Section. Examiners will include the nature of the problem, agreements to correct the problem, their supervision plans, and the reason no additional enforcement action was pursued.


F. DORs Not Adopted

Examiners will work with credit union management to develop corrective action plans. However, if officials do not adopt a DOR or a specific corrective action



plan at the exit meeting or joint conference, examiners will document the offi-cials’ disagreement or inaction using the following footnote:

“These plans for action, although not approved by the credit union officials, are recommended to correct the area of concern. The offi-cials have agreed to review the plans and to notify the Regional Dir-ector, National Credit Union Administration, [enter appropriate address], by [enter date], of the actions to be taken.”


G. Problem Code Identification Date

Examiners will enter all problems that meet the criteria for a DOR item into the AIRES DOR module for problem code tracking purposes. The AIRES DOR mod-ule and corresponding problem codes are to track repeat problems and DOR corrective action items, not necessarily continued areas of concern.

Examiners will complete the problem code area in the AIRES DOR module, including the date the problem was first identified. The problem code and asso-ciated date will be specific to the problem, and not just the problem area or risk factor. When completing the problem code areas in the AIRES DOR module, examiners will list the effective date the specific problem was originally iden-tified.

When a problem was identified in the past, but was resolved and remained resolved for a period of time (at least one to two contacts) examiners should not use the original date identified, but code it as a new problem. Examiners should ensure they are recording the corrective actions taken to resolve spe-cific problems and not combine similar problems as an ongoing problem.

For example, a small credit union may have had internal control problems for ten years. The NCUA needs to track whether the credit union is complying with the specific DOR corrective action plans issued at each exam. At the June 30 examination, the examiner issued a DOR corrective action plan to cross train employees and increase segregation of duties. When the examiner performs a follow-up examination effective 12/31, the examiner finds the credit union is in compliance with this corrective action plan and the examiner should show this DOR item as resolved. During the December 31 follow-up examination, the examiner issues a DOR corrective action plan for the supervisory committee to expand their review area. The date identified for this DOR item is December 31, since it is a new problem with a new corrective action plan. However, this does not mean that internal controls are not an ongoing problem in this case.



Examiners should acknowledge this and expand the scope as necessary, draft the DOR to address the root cause of the problem, or reflect the ongoing risk in the risk and CAMEL ratings.

Credit unions that have a history of similar or the same problems, even if there are long gaps between them, may warrant expanded review of that area or a DOR to address the root cause of the problem. Recurring problems are an indic-ation that the root problem needs to be addressed. For example, if an exam-iner writes a DOR to fund the ALLL account and determines that the officials properly funded the account at a follow-up contact, the examiner should mark the DOR as resolved. If the examiner notes at the next examination or contact that the ALLL is again underfunded, the examiner should develop a new DOR, with a new identification date, that addresses the root cause of the under-funded ALLL (for example, inadequate methodology, no internal controls to ensure the expense is recorded, etc.).

When a credit union has partially complied with a DOR item, the examiner must determine if the remaining corrective actions should still be included in the DOR. If an examiner determines it does not need to remain in the DOR, the examiner will mark the DOR as resolved; otherwise, the examiner will mark the DOR item as unresolved and carry forward with the same date identified. If the examiner wishes to re-write the DOR corrective action plan, they should mark it as resolved, noting in the comment section of the DOR module that only part of the DOR corrective action plan has been resolved, and then create a new DOR corrective action plan to address the remaining problems with the original date identified.


H. Require Credit Union to Cease an Activity

Examiners will use the following process when issuing a DOR that requires a credit union to cease or suspend an activity.

Step Notes

1. Obtain SE approval or dis-approval when issuing a DOR

Depending on the severity of the situ-ation, escalated administrative action



4. Perform a contact (on or off-site) within 120 days of being notified by the credit union that it is in compliance with the DOR to assess the credit union’s com-pliance and determine whether the DOR can or should be lifted.

Step Notes

(Regional Director letter, LUA, C&D, etc.) may be necessary.1

that requires a credit union to Clearly outline the steps the credit cease an activity. union must to take to resume the activity in the DOR.

2. Identify when you will perform a follow-up contact (on or off-site) Include this time in the “Plans and to determine if the credit union Budget” tab of the Scope module of has complied with the DOR item AIRES. based on the timeframe for com-pletion it has been provided.

3. Instruct the credit union to con-tact the Regional Director in writ-ing when it has taken the steps The regional office will then notify the outlined in the DOR item and examiner and SE. wants to resume the activity (this is done through the exam-ination report).

The ARD may approve exceptions to the 120-day follow-up requirement.

5. Complete an AIRES upload and If the credit union has not adequately issue a report to officials noti- corrected the problem(s), outline the fying them of whether they have remaining steps the credit union must met the requirements to take to resume the activity. resume the activity.

1For example, if a credit union has placed a large percentage of its assets in member business loans in a two-month period without adequate controls, policies, or procedures, a Cease and Desist order may be warranted in addition to a DOR.



This process does not prohibit an examiner from issuing DOR corrective action items to address the residual risk of the activity with timeframes for completion that correspond with the examiner’s supervision plan.

Last updated August 30, 2019

I. No Longer Applicable DOR Items

There may be instances when an examiner will need to mark a DOR item as no longer applicable in the DOR module, rather than Resolved or Unresolved. Examiners will not use NLA if a credit union has resolved the problem. Exam-iners must provide a comment when marking an item as NLA.

For example, it may be appropriate to use NLA if a DOR required the credit union to perform due diligence on a new indirect lending program, and the examiner finds that the credit union has discontinued its indirect lending pro-gram.


J. Problem Resolution

If a problem has been ongoing for many years, examiners must use judgment to determine whether it meets the definition for a DOR. Examiners should take the appropriate action, which may include:

l Marking a DOR as NLA because it has not caused harm to the financial or operational condition of the credit union

l Issuing a new corrective action plan that better addresses the root cause of the problem

l Moving the problem to the Examiner’s Findings, or

l Recommending escalated enforcement action

If an examiner determines that a problem is particularly severe, they will notify their supervisor and consider drafting a Regional Director letter urging the credit union officials to accept the resolution offered in the DOR or to formulate an acceptable alternate plan that recognizes and resolves the problem(s). However, it may be necessary to recommend escalated administrative action if agreement cannot be reached and the overall risk to the credit union warrants such action.



Examiners should notify the Supervisory Examiner of suspected fraud or eth-ical concerns in order to develop an appropriate supervisory strategy.

1. Document Disagreements

Examiners should document all cases of disagreement and the intended steps to ensure proper resolution and follow-up of the problems identified in the Con-fidential Section of the examination report.

2. Request a Response to a DOR

Under certain circumstances, examiners are required to obtain written responses to a DOR from credit union officials. To fulfill this obligation, exam-iners may include an action item in the DOR requiring the credit union to provide a written response to the examination report by a specific date. Exam-iners may also address this request in any open section of the examination report as necessary. When including this action item in the DOR, examiners will utilize the Non-Risk (Housekeeping) option under the risk areas in the DOR module.

3. Follow-up on DOR Items

Generally, examiners should follow-up on DOR items within 120 days after the timeframe for completion has passed. In the case of CAMEL 3, 4, and 5 credit unions, the current follow-up supervision requirements outlined in the District Management section of the NSPM will allow for adequate follow-up on DORs.

In CAMEL 1 and 2 credit unions with a DOR, examiners should evaluate whether a CAMEL 1 or 2 rating is warranted. If it is, examiners can set the time-frame for completion to coincide with the next scheduled contact or exam-ination. If the DOR is so time-sensitive that it needs to be completed sooner than before the next scheduled contact or examination, examiners will follow-up within 120 days of the timeframe for completion.

Examiners need to follow-up on outstanding DOR items through both on and off-site supervision. Examiners must follow national policy outlined in this manual (see the FCU Program and Procedures and FISCU Program and Pro-cedures sections of the NSPM) for completing on and off-site supervision.

Examiners should track DOR timeframes for completion and follow-up with credit union management via phone call or e-mail to discuss the status of DOR items as part of off-site supervision. Examiners should mark a DOR that can be



confirmed off-site as resolved or unresolved in the DOR module accordingly and upload the AIRES file.

For other items that need to be reviewed on-site, examiners should determine their status and update the DOR module at the next scheduled on-site contact. For simplicity, examiners may consider using the next scheduled contact date to determine the time-frame for completion.

When on-site for a follow-up contact or at the following examination, exam-iners should include review of the prior DOR in the examination scope. If unre-solved DOR items are identified, examiners should first identify why the item is unresolved to properly address and resolve the recurring problem. The reason a DOR item remains unresolved will determine the subsequent steps neces-sary.

The first step is to identify why credit union management did not resolve the problem. Consider the following:

l Did management make a good faith effort and comply with a majority of the corrective action plan?

l Did the corrective action plan prove to be unachievable or unreasonable?

l Did management resolve the root problem in a different manner than was agreed upon in the DOR?

l Did management comply with the corrective action plan, but the action did not resolve the problem?

l Did management ignore the corrective action plan?

There may be additional reasons the credit union did not comply with a cor-rective action plan. Examiners should consider these reasons when determ-ining the best way to address unresolved problems. For example, if management willfully neglects to address the problem the examiner should consider how management’s inaction affects the credit union’s CAMEL and risk ratings and whether escalated administrative action is necessary.

In instances where management completed a majority of the corrective action plan, the original DOR item was unachievable, or management complied with the corrective action plan but it did not solve the problem, examiners should develop a new corrective action plan to resolve the problem. Examiners should use their judgment to determine whether it is a repeat DOR item or if the ori-ginal DOR item is NLA.



In instances where management made a good faith effort or has completed a majority of the elements of a corrective action plan, a repeat DOR may not be warranted if the remaining items can be corrected in the normal course of busi-ness. Examiners should use the DOR definition outlined above to determine whether a problem should remain a DOR. Examiners must mark DOR items resolved when a credit union has implemented the corrective action, even if the financial trends do not yet reflect the improvements the actions were inten-ded to correct.

For example, a credit union has a high operating expense to average asset ratio and negative earnings. The DOR corrective action plan requires the credit union to reduce operating expenses. When the examiner follows-up, they note the credit union has made adequate expense cuts; however, the operating expense to average asset ratio remains high and will not reflect the full impact of the expense cuts for two more quarters. In this case, the examiner should mark the DOR as resolved. The examiner has multiple options to address the ongoing risk including, but not limited to:

l Documenting the credit union’s compliance with the DOR in the DOR Status Report and note management should continue to monitor the oper-ating expense to average asset ratio until the financial ratios reach the agreed upon goal.

l Documenting the credit union’s compliance with the DOR in the Exam-ination Overview and noting management should continue to monitor the operating expense to average asset ratio until the financial ratios reach the agreed upon goal. Create a new DOR for the credit union to achieve the agreed upon ratio goal (e.g., “achieve an operating expense to aver-age asset ratio of X.XX%”) with timeframe for resolution in two quarters to provide the financial ratios time to reflect the operating expense cuts.

For DOR corrective action items that will take more than one year to reflect full compliance, examiners should consider issuing individual DORs to achieve quarterly goals, with the applicable timeframe for completion. Examiners should work with credit union management to develop reasonable goals to include in the DOR.

Last updated January 22, 2018



4. Regional Director Letter A Regional Director letter is used when a credit union has serious and/or per-sistent problem areas that are not being resolved through field supervision alone. Examiners will ensure they fully address the issues through the exam-ination process first, but a letter from the Regional Director is an option to fur-ther emphasize the areas of concern.

l Sample Regional Director letter

A. Field Staff Responsibilities

l Discuss the recommendation for an RDL with the supervisor

l Address the primary areas of concern, corrective actions, expectations, and required response(s)

l Be direct, concise, and clear (as a general guideline, RDLs should not be longer than two pages)

l Write from the perspective of the Regional Director and with the appro-priate official audience in mind

l Direct the credit union’s board of directors to respond in writing to the Regional Director, with a copy to the examiner

l Examiners are responsible for all follow-up to ensure a credit union’s response is timely and appropriate.

l Indicate the recommendation of an RDL in the Examiner’s Comments sec-tion on the Completion Information tab of the Examination Management Console in AIRES

l Email the draft RDL to the supervisor for review and approval within three business days of the contact completion date

l The supervisor will review the report to ensure the letter is appro-priate and fully supported. The supervisor will then forward it to their region’s DOS mailbox within seven business days from the contact completion date.

l If the examiner does not include the required notification for down-grades/upgrades to a CAMEL 3, 4, or 5 in an exam report (as discussed in the NSPM), the examiner will process an RDL through the supervisor (and then follow normal processing through the regional office) to notify a credit union (only occurs under rare circumstances, and must be justified



in the Confidential Section) l Use the Acknowledge LUA and CAMEL Downgrade template

l If the NCUA did not participate and the SSA has upgraded to a CAMEL 3 or better, but notice of removal of troubled condition can-not be verified, use the Upgrade FISCU from Troubled Condition Status template.

l If the NCUA did not participate but cannot confirm notice was given to a FISCU, use the Notify FISCU of Troubled Condition template; this letter is used on an exception basis.

B. Division of Supervision Review

l DOS will review all draft Regional Director letters and prepare them for the Regional Director’s signature, and may make minor modifications to an RDL

l If major changes to the content are needed (deleting whole para-graphs, adding new or relevant information, changing the original intended message), DOS will contact the supervisor for concurrence with the changes or will return the draft directly to the supervisor for revision.

l DOS will mail (via expedited mail delivery service) the Regional Director letter to the board chairperson using the credit union’s address or board chairperson’s home address (and copy the CEO as appropriate)

l In special cases, DOS may mail the RDL to each board member’s home or the supervisor may determine if delivering the letter in per-son is appropriate.

l If the Regional Director or DOS decides not to issue an RDL, DOS will dis-cuss the decision with the field supervisor, who will then discuss it with the examiner

Last updated August 30, 2019

5. Letter of Understanding and Agreement A letter of understanding and agreement lists a credit union’s specific material problems and the corrective actions necessary to resolve them. It demon-strates to the officials the problems are a major concern to the NCUA and form-ally requests that officials agree to the listed actions in lieu of the agency taking formal administrative action (assuming it is an unpublished LUA; a published



LUA is a formal administrative action). The LUA will identify the areas of con-cern and the necessary corrective actions. Examiners will ensure LUA directives and timeframes are clear, specific, measurable, and easily understandable. No LUA will have a specific termination date unless the LUA is drafted in con-junction with a newly chartered credit union and not as a result of significant problems.

An examiner’s recommendation to issue an LUA typically needs to be based on an examination, follow-up examination, or onsite supervision contact sup-ported by an AIRES upload. Examiners will meet with key staff, officials of the credit union, and the SSA (in the case of joint contacts) during the examination or follow-up examination to develop an LUA.

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D. Issue an LUA

Examiners will ensure all significant concerns and corrective actions outlined in an LUA are documented in the DOR module. The LUA will address the most sig-nificant concerns identified in the DOR; it will not necessarily be an exact duplic-ate. However, an item in an LUA must be recorded in the DOR module and flow



through the DOR either at a prior contact or at the same contact during which the LUA is issued.

LUAs may either be issued/signed at the joint conference, or at a subsequent meeting specifically for the LUA signing after the joint conference and close of the examination. If an examiner opts to leave an exam open to issue the LUA at the joint conference, they may request a waiver of the 60-day completion requirement, up to a total of 90 days.

To prepare an LUA, examiners will:

l Obtain supervisor concurrence and document supervisor agreement in the Confidential Section, as required by the NSPM

l Discuss the intent and the preliminary content of the LUA during the pre-liminary meeting with management in advance of signing the LUA

l Notify management, with their supervisor, that the issuance of an LUA is subject to review by the Regional Director

l Draft an LUA and email it to their supervisor no later than three business days after completing the contact

Upon receiving a draft LUA, supervisors will:

l Review the LUA and make a recommendation to either issue it or not

l Notify the appropriate associate regional director of all LUAs to be issued, regardless of asset size of a credit union

l Forward the draft LUA to the region’s DOS mailbox for processing and Regional Director approval within seven business days from receiving the draft LUA from the examiner

Upon receiving an LUA from a supervisor, DOS will:

l Discuss all material changes to the LUA with the field supervisor

l Return the final, approved version of the LUA to the supervisor by e-mail, or by other means as appropriate, for delivery to the credit union

l Work with the supervisor and examiner to review the draft LUA in a mutu-ally agreeable timeframe

Examiners will send an electronic copy of the final, approved LUA to credit union officials via ZixMail, before the signing meeting. Examiners will allow offi-cials a minimum of two business days to review the LUA before they sign it.



Examiners will print at least two copies of the final approved LUA and present it to the officials in the manner described in the NSPM. If a quorum of directors signs the LUA, it is considered to be accepted by the board.

DOS and the credit union receive the original signed copies of the LUA. The supervisor and the examiner will receive a scanned electronic copy (from DOS) for their records. In the case of a FISCU, the regional office will decide if a third original copy is necessary.


1. Problem Code Illustration

An item in an LUA must be recorded in the DOR module and flow through the DOR either at a prior contact or at the same contact the LUA is issued. The prob-lem code in the DOR module should remain unresolved until the problem is resolved, regardless of whether the problem is outlined in the DOR or LUA.

The scenarios below outline the flow of items through the DOR module, DOR, and LUA.

Scenario A

Scenario B




E. Deliver an LUA

An examiner and their supervisor will deliver an LUA to the credit union at a meeting of the board of directors. The supervisor will give the associate regional director advance notice of when the LUA will be delivered, and will attend all joint conferences in which an examiner presents an LUA to credit union officials.

When delivering an LUA, examiners will:

l Arrange for delivery of an LUA as soon as possible, but within 14 business days after receipt of the final approved version

l Conduct the meeting and explain the LUA to the board of directors

l Document the supervisor’s attendance at the meeting l For a FCU, document in the Confidential Section of the examination report.

l For a FISCU, document in the WCC 26 Review or memo summarizing the results of the joint examination.


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